Despite Record Stocks, Economy Remains on Slippery Slope

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Be wary of Wall Street’s euphoria, because the stock market is out of sync with economic fundamentals. The stock market continues to set new records, but current economic indicators paint a fuzzy picture.

The most important economic indicators are sluggish at best. They point to a slippery slope ahead, not to the good times suggested by the stock market’s recent performance- so look at other indicators and beware of false signals.

To determine how the economy is doing overall, the Gazelle Index staff looked beyond the stock market. Why? Because it is important to keep in mind that stock indexes often post their best performances when the economy is growing very slowly.

When the economy is growing slowly, inflation does not pose a scare to investors. Also, today corporations have stock piled so much cash and invested so little, that money must find profitable outlets that can generate a reasonable return. Given the dismal return in bonds, the stock market is the logical choice.

Therefore, the Gazelle Index looks beyond the market at some of the most important benchmarks of current economic activity. While it is important to monitor how the stock market is doing, it would be foolish to judge the state of the economy by what is happening on Wall Street.

Economists and market watchers follow certain fundamental economic indicators very closely. They look for signs that tell them what is happening now and what to expect in the future.

By understanding sensitive indicators , investors, market watchers and ordinary persons can determine how changes that are occurring and might affect their savings, investment portfolios, job opportunities and retirement outlook.

Congress has allowed the sequester (i.e. massive cuts in government spending) to remain in place. Therefore economic indicators are important to them because they reveal signs about employment and unemployment – a hot button political issue. If employment continues to worsen as it did last month, elected officials may pay a price for the sequester at the ballot box.

Business owners follow indicators because they provide signals about the wisdom of hiring, making a capital investment or ordering inventory.

All economic indicators are not equal; some are more important than others are. The relevance of a particular indicator depends upon how sensitive it is relative to day-to-day, weekly, monthly or quarterly changes in economic activity.

The best indicators are those which are most sensitive to changes in the business cycle—a term used frequently by economists. A business cycle is the regular pattern of ups and downs in the economy. Most people refer to them as recessions and expansions.

However, the business cycle has four phases: an expansion phase (sometimes called a recovery or growth stage). Believe it or not, the US has been in a recovery since June of 2009. It does not seem so because so few jobs have created.

Business cycles have three other phases as well: a peak (the top of the cycle—this occurred last in November of 2007); a contraction (usually called a recession—the Great Recession lasted from December 2007 to June 2009); a trough (the bottom or lowest point of a recession).

The phases of the business cycle resemble the up and down patterns of a wave. The positive incline of the wave represents the expansion. The top of the wave represents the peak. The downside of the wave represents the recession, and the bottom is the trough.

Over the last 50 years, the expansion has lasted five years. Incidentally, we have had 11 business cycles since 1949, and 35 since 1854, the very first one.

Important Indicators to Watch

Job Creation and Unemployment: The monthly report on employment and unemployment is the most closely watched indicator of current economic conditions. The percent of workers unemployed is created from a survey of 60,000 households. The unemployment rate for March (reported the first Friday of April) was 7.6%. The unemployment rate for blacks (13.3%) is usually twice the unemployment rate among whites (6.7%).

The overall rate of unemployment declined in March because 496,000 fewer people were in the labor market. As people leave the labor market, they are no longer counted in the unemployment tabulation. The next unemployment report will be released on Friday, May 3rd. It is estimated that the unemployment rate will remain the same or increased slightly to 7.7%.

The change in payroll employment: This indicator comes from a broad national survey of 440,000 business establishments, and it measures the number of new jobs firms added to their payrolls. In March the number was surprisingly low– only 88,000. The estimated number of new jobs created for the upcoming report on May 3rd between 135,000 and 155,000. While this is the most closely watched figure regarding the labor market, this number is also adjusted regularly in subsequent months. For example, the original February number of 236,000 new jobs was adjusted upward to 268,000 in March.

Initial claims for unemployment compensation: This provides a signal about whether firms are continuing to lay off workers or whether the labor market is improving. The figure is reported weekly and the most-recent number, reported April 13 was 339,000. That is a good sign that the labor market is improving.

Personal Savings Rate: Before workers are paid, employers subtract taxes and other withholding from their paycheck. What remains is disposable income. The income is either spent, or if it is saved (investments are considered saving). Consumer spending accounts for over 70% of all spending in the economy.

A decrease in savings can occur for two reasons; either consumers have decided to spend more out of their disposable income, or they have less disposable income to spend or save. In March, consumer saving was 2.7% which is among the lowest points it has reached during the current economic recovery. The decline in savings was also accompanied by a decline in retail spending which means the increase in taxes that occurred because of the negotiations over the fiscal Cliff have cut into disposable income and therefore reduced savings and spending.

Important Indicators other than Housing are Sluggish

  • Housing Starts: Increase from 968,000 to 1,036,000 over the last month
  • Auto and Truck Sales: Remained constant at 15.2 million units in March
  • Retail and Food Sales: Declined last month,  -.4%
  • Case-Shiller Housing Price Index: housing prices increase by 1.2% between Jan and Feb
  • Consumer Sentiment: Declined between March and April to 76.4
  • Gross Domestic Product: Grew by 2.5% during the first quarter of 2013
The indicators above suggest that the stock market is out of sync with economic fundamentals –so beware.

Last modified: May 1, 2013

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